Economic Analysis of Wind Projects

This Application Note presents and illustrates key elements associated with the economic analysis of wind energy projects and is aimed at municipalities, cooperatives, investors, and companies that want to install wind parks on their premises.

Wind investments can provide an attractive risk/return profile, as well as other potential benefits such as risk diversification and a hedge against rising fuel prices. The increasing number of Power Purchase Agreements (PPA) being closed worldwide show that in some cases wind is already cost-competitive against traditional energy sources. Electricity consumers (the offtakers) are often better off by securing a fixed long-term price for wind electricity, instead of buying electricity from the grid at an uncertain (and arguably increasing) rate.

Nevertheless, in order for wind projects to be viable, it is necessary that the business model be based on a stable scheme that enables long-term predictable revenue streams, regardless of whether it is market driven (PPA) or politically driven (FiT).

In all cases, an economic analysis of the investment opportunity is required before undertaking the project. Several financial indicators are useful for assessing the viability of the project, including IRR, NPV, and payback period, among others. Moreover, it is advised that conservative assumptions be used in the financial model and sensitivity analysis be performed to consider the impact of different scenarios on profitability.

Wind investments are generally structured with high leverage, thanks to the relatively predictable and stable nature of future cash flows. The two main financing alternatives are corporate finance and project finance. These are still in place even in the most challenging markets in the current context of global financial downturn, albeit at higher prices and with more restrictive conditions than previously.

Even though a wind energy investment is exposed to different risks (technical, legal, and financial, among others), there are many ways these risks can be reduced throughout the lifetime of the project. For instance, technology risk can be reduced by installing proven wind turbines, relying on warranties, and performing preventive maintenance.

Log in to post comments

Highlights

  • Wind investments can provide an attractive risk/return profile, risk diversification, and a hedge against rising fuel prices
  • The increasing number of PPAs being closed worldwide show that in some cases wind is already cost-competitive against traditional energy sources
  • Conservative assumptions should be used in the financial model and a sensitivity analysis performed

Follow us